The credit rating of Russian National Commercial Bank (hereinafter – RNCB, or the Bank) is based on its stable, but concentrated business profile, strong capital adequacy position, weak risk profile and adequate liquidity and funding assessment. An additional rating factor rests with Bank’s moderate systemic importance for the Russian economy and a very strong state influence on its creditworthiness, according to the ACRA methodology.
RNCB is the largest credit institution of the Crimea region dominating the Republic of Crimea and the city of Sevastopol by the majority of performance indicators. The Bank is owned by the Russian Federation (100% control), while its nominal shareholder is the Federal Agency for State Property Management. RNCB owns PJSC KRI BANK operating in the Krasnodar Krai and put under the financial rehabilitation procedure. RNCK ranks 49th by assets (as of March 01, 2018) and 23rd by equity (49th based on the consolidated data of the bank group comprising RNCB and KRI BANK (the Group)) in Russia.
Key rating assessment factors
High probability of extraordinary support from the government. RNCB is a dominating player at the Crimea peninsula, a market strategically important for the Russian Federation. RNCB’s bankruptcy may lead to a significant deterioration of economic environment in the Republic and pose certain risks for its population, as the Bank is responsible, among other things, for servicing a significant amount of social payments. At the same time, RNCB’s default will not result in significant risks for federal or regional budgets, as its share in budget revenues in small. In ACRA’s opinion, the above factors indicate a medium systemic importance of RNCB.
The state exercises shareholder control (through its 100% ownership) and operational control (by defining strategy and providing capital) over RNCB’s activities. Providing loans for financing pivotal infrastructure projects in Crimea and Sevastopol, RNCB is thus involved in activities of regional importance. The Agency is of the opinion that the state has a very strong influence on the Bank’s performance.
Business profile assessment includes risks of regional specifics of the Bank’s business. The key operational region the RNCB is Crimea, where not so many leaders of the Russian bank industry present. This allows the Bank to increase actively the volume of its operations, but makes it dependent on the sanctions regime. To the contrary, KRI BANK is under pressure of tight competition in both active and passive transactions, which limits the possibilities for its rehabilitation in the Krasnodar Krai ACRA rating: A(RU), outlook Stable, The high share of non-interest earnings in the 2017 operating income supports the high diversification of the Bank’s business.
In 2017, RNCB was recapitalized to support the Group’s capital adequacy after the acquisition of KRI BANK.
As a result, the Agency’s assessment of the Bank’s franchise has not changed, regardless of the stronger capital positions of the head bank.
RNCB maintains a significant loss absorption buffer under regulatory requirements (N1.2 = 53.62% as of March 01, 2018, N20.1 = 16.56% as of January 01, 2018). Such substantial loss absorption buffer and the high quality of assets allow the Bank to withstand a 500+ bps credit risk increase without a breach of capital adequacy ratios. The Agency notes that the risks of formation of additional reserves for certain problem assets of KRI BANK have been taken into account in the Group capital adequacy calculations through recognition of negative goodwill. In addition, ACRA is of the opinion that there is a high likelihood that RNCB will be recapitalized if further reserves are needed to support the assets of KRI BANK. Therefore, the Group is also able to withstand a significant increase of credit risk.
The RNCB’s ability to generate capital at the level of the Group remains moderate. The Bank showed a positive performance (according to the IFRS statements for 9M2017), but the 2016–2017 averaged capital generation ratio of the Group amounted to 40 bps.
ACRA assesses the Bank’s risk profile as weak, due to a high concentration of its loan portfolio on the largest borrowers, the expected fast growth of the Bank’s assets, and the low quality of assets of KRI BANK.
According to ACRA estimates, the share of NPLs and potentially NPLs is about 5.6% of the Bank’s portfolio (except loans covered by state guarantees), which indicates a high quality of loans issued. But the share of top 10 loans issued by the Bank, except loans covered by state guarantees, is over 50% of the total portfolio, which shows an increased concentration of the credit risks. As of December 31, 2017, the share of NPL90+ was less than 1% in the Bank’s portfolio. At the Group level, such share reached 18% due to loans issued by KRI BANK. The Agency notes a high level of coverage of NPL90+ of KRI BANK (under IFRS) and excludes such loans when assessing the quality of the loan portfolio. But the balance sheet of KRI BANK contains other low-quality assets (including securities, interbank loans, etc.), which worsens the risk profile assessment of RNCB.
In 2018, the Bank is expected to keep high asset growth rates through, primarily, increased portfolio of loans to be issued to SMEs and individuals. The Agency is of the opinion that the fast growing loan portfolio may affect the portfolio quality in the future.
Liquidity and funding position of RNCB is assessed as adequate. The Agency is of the opinion that the Bank’s liquidity positions remain strong on the level of both the Group and its members.
The Agency notes that the Bank’s dependence on retail clients remains high (over 60% under the IFRS statements for 9M2017). In addition, the liabilities of KRI BANK are concentrated on the funds of the Deposit Insurance Agency. The resource base concentration risks limit the final funding assessment of the Bank.
Key assumptions
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Retaining the Russian government’s shareholder control over the Bank;
- Adhering to the current business model within the 12 to 18-month horizon;
- Maintaining high diversification of operating income;
- Tier-1 capital adequacy (N1.2 and N20.1) not lower than 10% within the 12 to 18-month horizon.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- A successful implementation of the current strategy;
- An increase in the business scale of the Bank;
- A decline in concentration of the loan portfolio while retaining its quality.
A negative rating action may be prompted by:
- A deterioration of competitive environment in the key region of presence;
- A decline in asset credit quality as a result of a rapid loan portfolio growth;
- A decrease in capital adequacy ratios at the Group level.
Rating components
Standalone creditworthiness assessment (SCA): bbb.
Adjustments: state influence, 3 notches up to the SCA.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of RNCB was first published on April 11, 2017. The credit rating and its outlook are expected to be revised within one year following the rating action date (April 05, 2018).
The credit rating is based on RNCB data, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of RNCB and statements of RNCB composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and RNCB participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by RNCB in their financial statements have been discovered.
ACRA provided additional services to RNCB. No conflicts of interest were discovered in the course of credit rating assignment.
